Press Release No. 01/2

Press Release: IMF Approves In Principle Second Annual PRGF for the Central African Republic

January 10, 2001

The Executive Board of the International Monetary Fund (IMF) today approved in principle the second-year program for the Central African Republic under the Poverty Reduction and Growth Facility (PRGF)¹ in an amount of SDR 20.0 million (about US$26 million), to support the government's economic program. The decision will enable the Central African Republic to draw SDR8.0 million (about US$10 million) from the IMF. The proposed access under the second annual arrangement has been increased by SDR 3.5 million (about US$5 million) relative to the annual amount provided under the initial three-year arrangement.

The Central African Republic's three-year program, originally under the Enhanced Structural Adjustment Facility (ESAF), was approved on July 20, 1998 (see Press Release No 98/32) in an amount of SDR 49.4 million (about US$65 million), of which an amount equivalent to SDR 24.5 million (about US$32 million) has been disbursed.

A final decision by the IMF Executive Board is pending discussion of the Central African Republic's interim Poverty Reduction Strategy Paper (I-PRSP) by the World Bank Executive Board, which is expected to take place on January 18, 2001.

In commenting on the Executive Board discussion on the Central African Republic, Stanley Fischer, First Deputy Managing Director, made the following statement:

"The Central African Republic faced unusually difficult circumstances in 2000, as a result of slippages in program implementation, as well as higher international oil prices and a doubling in oil transportation costs following the suspension of imports from Kinshasa. Economic activity slowed and government revenue collection fell short of target, which led to the accumulation of external and domestic payments arrears, including on the government's wage bill.

"The measures implemented in the last quarter of 2000 and those planned under the 2001 program should help the authorities regain control over the public finances and lay the basis for a resumption of strong economic growth. The PRGF-supported program is part of a longer-term strategy to increase spending for poverty reduction and investment in the social sectors and basic infrastructure, while containing fiscal and external imbalances. It will be essential for the authorities to raise government revenue, ensuring in particular the full collection of petroleum-based taxes and duties, as well as a smooth functioning of the tax and customs administrations.

"There has been good progress in implementing structural reforms. The privatization of petroleum distribution has been completed, and the liquidation of the national oil company is expected by June 2001. The authorities are also planning to place the large public companies in the electricity and telecommunications sectors under private management, and to divest or liquidate the remaining public enterprises, with World Bank financial and technical support.

"The C.A.R. needs additional external assistance because of the deterioration of the terms of trade, the impact of disruptions in oil supply, and to help the authorities regain control over the fiscal situation and accelerate the repayment of arrears. Therefore, financial assistance from the Fund under the second annual PRGF arrangement has been increased, relative to the amount that was envisaged under the three-year arrangement approved in 1998. It will be important that the authorities adhere strictly to the scheduled repayment of arrears and normalize relations with external creditors rapidly, which over time will open the way for additional financial and technical assistance from the international community.

"The authorities are to be commended for preparing an interim Poverty Reduction Strategy Paper (I-PRSP), as a first step in formulating a comprehensive poverty reduction strategy in a broad-based participatory manner. The I-PRSP provides a good basis for the development of a full participatory PRSP and for Fund concessional assistance. Preparation of the full PRSP will require both the broad participation of civil society, and significant improvements in the capacity for analysis of determinants of poverty and constraints on poverty reduction. The authorities will also need to develop budget systems to evaluate and prioritize interventions, enhance the targeting of poverty reduction programs, and strengthen monitoring and expenditure tracking mechanisms," Mr. Fischer said.

Program Summary

The Central African Republic was hit by two oil shocks in 2000, as higher world market prices were compounded by a surge in transportation costs. Real GDP growth slowed by an estimated 2½ percent in 2000, compared with a projected 5 percent, and 3 ½ percent in 1999. The slowdown in activity mainly reflected poor weather conditions for agriculture and disruptions in the supply of petroleum products in midyear.

The program for 2001, supported by the second annual PRGF, seeks to strengthen economic management and, in particular, move toward fiscal sustainability. Growth is projected at 5 percent in 2001 and over the near term. This projection assumes normal conditions for agriculture, continued expansion in the forestry sector, and sustained growth in manufacturing and trade.

Fiscal policy under the program is consistent with the interim poverty reduction strategy program. A key challenge facing the authorities is to raise revenue collection. The revenue ratio in the Central African Republic remains one of the lowest in sub-Saharan Africa and constrains the functioning of the central administration. The authorities have adopted a two-pronged approach to improving revenue by implementing measures to strengthen tax, customs and treasury directorates administrations, and, streamlining the tax system. Measures are also under way to improve expenditure control and treasury cash management.

The structural reform agenda continues to focus on measures designed to improve economic efficiency and increase growth potential. In this regard, the privatization or leasing out of the three major public enterprises in the energy, oil and telecommunications sectors remain key. The authorities also intend to launch additional privatization or liquidation operations in the second batch of public enterprises.

On the social front, the authorities have prepared an interim poverty reduction strategy paper (PRSP), which reviews ongoing poverty alleviation policies and describes the road map for preparing a full-fledged PRSP. The preliminary statement on poverty reduction strategies and medium-term economic policies describes the timetable to be followed in convening a national conference aimed at defining this strategy, in the context of a participatory process that would bring together the civil society, nongovernmental organizations, bilateral donors, and international organizations.